You Can't Cheat an Honest Man - James Walsh [127]
Smart Ponzi perps—or merchants who’ve dealt with perps—faced with fraudulent transfer claims from angry investors will usually make a so-called “good faith defense.” Basically, they will claim that they entered the business honestly and that whatever trouble followed was simply the unpredictable course of business.
Legally, the good faith claim places the burden of proof on the person making it. The main stumbling block: A person lacks the good faith essential to the defense if he or she possessed enough knowledge of the facts to induce a “reasonable person” to inquire further about the transaction.
Reasonable person standards can be complicated. But one court considering a collpased Ponzi scheme offered this common-sense guideline: “some facts suggest the presence of others to which a transferee may not safely turn a blind eye.”
A Ponzi perp who’s able to sustain the good-faith defense avoids claims of actually fraudulent transfer. The easiest way to avoid claims of constructively fraudulent transfer is to show that disputed deals involved reasonably equivalent value.
Reasonably equivalent value can be established in a number of ways. Two of the simplest: to show that the sale was made in a retail environment and to enlist a recognized expert to broker the sale. This is why smart Ponzi perps will be finicky sellers—it gives them credibility in the moment and deniability later.
Case Study: Stanley Cohen’s Bogus Benzes
Going after people who get money out of a Ponzi scheme can be difficult—especially if the people are vendors or creditors rather than investors. One colorful car scheme shows why this is.
Ponzi perps love driving Mercedes Benzes. Once in a while, a perp will try to make money from this passion. Stanley Cohen concocted a not very clever, I-can-get-it-for-you-wholesale Ponzi scheme in which he accepted money from prospective buyers of premium cars and used it to buy the things at full retail. Because he was losing money—in some cases, quite a bit—on each sale, the scheme headed for collapse more quickly than most.
Cohen’s investors were entertainment industry figures whom he reckoned were greedy enough to want the most expensive cars on the road...and not quite rich enough to afford them. There is no shortage of people like that in the entertainment industry.
In the typical transaction, Cohen would explain that he could get a Mercedes Benz 500SL for $80,000, even though the car had a retail sticker price of almost $115,000. He claimed that he had some heavy connections in the auto industry; but he remained vague about details. If a person wanted the hard-to-get model cheaply, he or she had to give Cohen the $80,000 quickly, in cash and up front.
Like in all Ponzi schemes, this promise was too good to be true. Several people would each pay Cohen $80,000. Cohen would then go to a dealer, say that he was an agent for some Hollywood high-roller, sign contracts to purchase as many vehicles as his funds allowed, and write checks for the full $114,500 for each vehicle.
The dealer, confirming that Cohen had sufficient funds on deposit to honor the check but not otherwise investigating Cohen’s bona fides, would prepare the cars for delivery. Cohen would then tell the dealer to whom to deliver (and place in title on) the vehicles.
Neither the numbers of vehicles involved nor the method of payment were, in the experience of the dealers, extraordinary. However, if the dealers had investigated Cohen’s creditworthiness in greater detail, they would have discovered that he had a checkered financial past— including at least one previous personal bankruptcy and involvement in financial frauds dating back to the 1940s.
Since Cohen was losing $34,500 per vehicle (or more, because he was also taking money for himself), the number of cars he bought was always lower than the number of people who’d paid him $80,000. Other